Category: Uncategorized

If you want to get something done, it helps to have specific goals. Shooting a target is tough if you don’t know what that target is.

Properly calibrating the target is imperative. Chasing the wrong goals can engineer counterproductive incentives. It sounds like the goal should be obvious, but it can be subtle. We want to attack a problem directly, not the symptoms.

Creating complex rules to tackle a bevy of symptoms can, in fact, exacerbate the problem. For example, complex banking regulation has drastically raised costs of compliance which has in turn caused consolidation. Some have even theorized that the shrinking number of small local banks has been a primary factor in the slowness of the recovery from the financial crisis in small business funding.

There are times where consolidation may be a healthy market development, but we should recognize how regulation impacts the market and its participants (i.e. all of us). Rent control discourages investment in property improvements. Raising minimum wages and thus labor costs in low-skilled occupations can accelerate automation by encouraging capital investment. Restricting development increases housing costs for everyone by reducing supply. The point is not that regulation is bad; sometimes the benefits outweigh the costs and other times the side effects are in fact positives. The point is that sometimes our good intentions are perverted into worse outcomes. Even the housing crisis a decade ago began with the noble desire for higher home ownership rates among American citizens. The multitude of public and private mechanisms are too complex to tackle here (I recommend Adam Tooze’s Crashed for a thorough treatise), but the added up to reckless abandon and irresponsible lending.

Back to the crux of the matter: how do we avoid paving the road to hell with our thousand good intentions? We must not latch onto the first problem we see. Before we can go about solving anything, we must first understand the underlying causes and mechanisms of the issue down to the depths of their basic elements. This is easier said than done, but that is precisely why we must not rush anything and starting small is almost always preferable to large-scale interventions.

Perhaps the most visceral example is that of the so-called “war on drugs.” It started with Nixon and every time it became clear that drugs were still being consumed en masse, we threw more money and resources into enforcement. In the process, we have lost sight of what we were trying to accomplish: a reduction in consumption. By trying to prevent supply from reaching consumers, we may have caused temporary disruptions in supply or increases in price, but with demand standing strong the long-term effect was sinister. Illegal organizations popped up everywhere and the most violent ones gobbled up the smaller ones. Now we are left with international criminal cartels whose violence can only be described as astonishing. Their power rivals that of the state in some countries. The worst part is that we already had a fantastic example of what happens when you criminalize consumption in the shape of the prohibition of alcohol in the 1920s.

Why did we fail so spectacularly? We approached the problem as if the world was as we wished it to be rather than how it actually exists. How, then, can we go about truly understanding problems and their mechanisms?

It turns out humanity has developed a fantastic system for displaying what we collectively value. It’s been around for millennia and you use it every day. It’s called a market. We need to use it as a reference not only for understanding what is happening, but as a tool for experimenting with solutions and magnifying policy implementations. By simply playing with incentives, we can put private money to work at the things we wish to achieve. Work with human nature rather than attempt to stymie it.

Private interests will flock to new industries if it is clear they can make money doing it. Competition will sprout solutions no individual could have dreamed about. The key here is to engage all the stakeholders and understand that true sustainability must include profits.

Did you know the person who works at the nail salon down the street needs a license to do so? How about that the person cutting your hair needs 1500 hours of schooling to do so or that, in order to braid hair for money, you need 300 hours of instruction (in Illinois)? Laws vary state by state, but across the country we have restrictive licensing requirements for professions that are, to put it mildly, not dangerous should a practitioner commit a catastrophic error.

Imagine having gone through the trouble of achieving a license in one state and wanting to move to a different one only to discover that you would have to learn to comply with a whole new set of regulations. In some cases, you have to redo or supplement your already extensive training regardless of your existing work experience.

This is the system we currently live under. If our leaders want to help small business thrive, the first step should be to trim the thicket of regulation that blankets our country.

The status quo benefits almost no one but drives up prices for consumers while lowering quality of service. Competition suffers when needlessly high barriers to entry are erected around such professions. In many cases, compliance can be confusing and expensive. Economists rarely agree on anything, but there is nearly universal agreement that the current situation is terrible.

Nothing is being done about it.

It’s time to bring ourselves into the 21st century and make doing business easier. We should centralize licensure and drastically reduce it. One method of doing this is to place a sunset on all existing licensing requirements. That way, we can create new ones that will have to be justified. we can allow states to present reasons in front of commissions whose purpose is to veto nonessential requirements. Placing a sunset on current requirements would give them time to present their need (or not) while quickly cutting out unnecessary regulation.

Regardless of who you are or where you live, you probably know an immigrant. Even if you aren’t on a first name basis, you have met them and interacted with them. You can’t avoid them. The US population is 15% immigrant.

Still, if you aren’t one, it may seem like what happens to them does not affect you. Worse: if you see successful immigrants or immigrants working while native citizens struggle to find high-paying or even middle class jobs, you may believe their presence is taking opportunity from those who were here first.

Your answer, then, to ‘How does immigration affect you?’ may be that it makes it harder for you or your peers to succeed. The problem with that answer is that regardless of who you are, immigration leads to higher wages and lower rates of unemployment. Yes, this includes those who have not attained a high school level education.

It is difficult to arrive at this conclusion through abstract reasoning, but the evidence is irrefutable. To understand why, it helps to think on a smaller scale. Bear with me as we approach the issue through a narrative.

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Rick and Ronda are farmers in West Virginia. They wake up early each day to tend to their herd of pigs and they work into the evening ensuring their crop of corn is growing well.

They sell what they can to the folks in nearby towns, but the bulk of their crop and most of their pigs are sold to large processors who pay them less and aren’t as discerning in the quality department.

They can employ some local boys seasonally to help get everything done, but they can’t afford to pay that well and it’s hard work. Not many people want to work that job.

Turns out, though, that there are plenty who would work that job if it meant they could move to the good old US of A. They’ll work at lower wages and they’ll work long hours.

If they come, aren’t they taking money out of the local boys’ pockets? Well, no, and I’ll tell you why. It means Rick and Ronda get to keep more of their revenue which means they can invest it in their business or spend it in other ways in the community. These immigrants have to live locally if they’re working locally, so the money they make goes right back into the local economy as well.

Those boys can work for better wages doing other work such as building new homes for the new residents. Local stores and restaurants can hire more people because they have more customers buying things.

This is how an economy grows. This is how America was built. This is how our ideals of freedom and democracy can defeat our autocratic rivals.

Immigration is quickly coming to the fore as our country’s most contentious issue. It needn’t be. We can construct policy that helps our citizens regain control while growing our population and improving our demographics problem. To achieve this, we will first talk about security, then move on to what exactly our demographics issue is, and finally move into a sensible solution.

Kicking off, let’s get into border security. Those two words never seem to stray too far from our president’s lips, so it must be addressed. We have been inundated with stories of violent gang members committing heinous crimes and terrorist attacks perpetrated on Western soil. While a majority of those attacks have in fact come from natives of each country, enough have been carried out by immigrants to push the narrative against them. The potential for a real disaster is simply too visceral for the public psyche to avoid. A wall, however, would do near enough to nothing actually decreasing the flow of bad actors to make erecting one an exercise in futility that would achieve no more than publishing a monumental need for a security blanket to the world.

Real security from organized crime would involve removing profit centers from the cartels through legalization of some drugs while taking proper care of addicts. A more expansive examination of that measure is beyond the scope of this essay, but that would significantly weaken the criminal enterprises south of our borders. Even eliminating entire cartels only serves to temporarily reduce the influence of this criminal activity. The relatively inelastic demand for their product coupled with the monopoly they have created by governmental restrictions paired with paramilitary resources squashing competition means new ones just spring up like weeds. Their income must be restricted to eliminate their power. Restrictive immigration policy nor a wall do anything to mitigate it.

Terrorism, meanwhile, is a much more complex issue. We (the US) have been fortunate not to have a major attack since 9/11. Nevertheless, it has been present enough in Europe that the occasional minor attack on American soil keeps it as a persistent political issue. A comprehensive solution to terrorism is also beyond the scope of this essay and frankly my knowledge, but a broad overview would likely involve reaching out to the disaffected and continuing to explore ways to improve identification of potentially violent actors. By reaching out to the disaffected, we can better integrate them into society and by identifying the potentially violent we can better monitor them. This relates to border security only in that we would need to use sophisticated screening on visa and asylum applicants. Pooling of information between intelligence agencies and border control would be essential.

With a firm grip on security and regular communication of the important steps taken to ensure it, people can let go of those fears. That, in turn, opens the door to greater cooperation and collaboration between political parties on comprehensive policy to scale up legal immigration. This just so happens to be the cheapest, easiest, and simplest solution to our demographics issue.

If you have never thought about our demographics as a problems in the past, you can be forgiven as it has remained remarkably absent from any significant media coverage or public debate despite a rapidly approaching specter of ballooning pension liabilities coupled with a plateau of prime working age population. Look at those graphs! The coming retirement of the baby boomer generation is a terrifying prospect indeed and ignoring it will not make it go away. Longer lifespans and lower birthrates have combined to create over $34 trillion in unfunded obligations by the Social Security Administration’s own calculation as of 2018 for Social Security alone. The addition of medicare likely doubles this number. Rather than continue to pour on the numbers, I’ll simplify the status of our finances into three words: we are fucked.

Employment ratio of prime working age population shows low growth is not because of millennials playing video games in their parents’ basements.

Prime working age population has plateaued.

Total population has continued to grow.

Because the share of those over 65 has skyrocketed.

And here’s a chart of American demographics.

What, then, could possibly be done? As you can see from the above demographic chart, this bomb will explode within 10 years. One of two things (or, preferably, both) needs to happen. Productivity needs to grow at an unprecedented rate. If we rely on that alone it would literally have to grow by an order of magnitude. Alternatively, we need a MASSIVE influx of young people to grow the population over which these obligations are spread. Since hoping for a spontaneous outbreak of prosperity far greater than in the history of humanity is likely not the wisest course of action, we are left with growing the working age population. Let’s make some babies! The only difficulty is that we’ll have to create a culture shift only seen before following major wars. And we’ll have to put them to work at age 5. What we are left with one last possible solution: the much-maligned, much-celebrated migrant.

Skilled (and unskilled) workers are quite literally lining up at our gates. All we need to do is let them in. Immediate steps need to be taken if we are to address this problem. We make it extraordinarily difficult for graduates from American universities (even PhDs!) to stay after they finish their degrees. We need to create a new, expanded student visa that allows graduates to stay 10 years after graduation. We need to make it easier for people to apply for (and receive) permanent status via green cards after working here (and paying taxes) for 3-5 years. We can even charge them a significant fee to receive the green cards as an additional revenue booster. Something as high as $5,000-10,000 will seem a small price to pay for someone who has built a life here to have the stability and peace of mind such a status grants. We need to make it easier to skilled migrants to receive H1-B visas by vastly increasing the number we give each year; perhaps we could even remove the limit. This program has a been a boon to companies struggling to find people to fill positions and grow. Restricting it places small businesses at an unfair disadvantage to large companies that have the resources to perfect applications; they out-compete by bureaucracy. Finally, we need to lower the bar for people fleeing violence to claim asylum. They will be grateful for the opportunity to create a new life and happy to work hard. We can even require a set amount of years of work before offering any financial aid or welfare to prevent abuse of the system. Screen, yes, but welcome those who pass with open arms.

The economy is not a zero-sum game. Increasing population means more consumers, more employers, and a bigger pie. The bigger pie is the only way we will be able to fulfill our obligations to our elderly without being crippled from doing anything else. Forget all the appeals to humanity. There are plenty of reasons to choose from that are self-interested and patriotic.

A debate is being conducted as to the effectiveness of sending capital abroad to low-income countries. The merits are not being discussed, but it has been flogged by Donald Trump as a waste of money to give foreign aid or a loss of opportunity for the US in the case of foreign direct investment while China has continued to expand their Belt and Road Initiative. Like any other action, there are both benefits and pitfalls, but in general it should be viewed through the same lenses as any investment: if the probability of success multiplied by the average expected payoff is greater than the probability of failure multiplied by the average expected loss, it is likely a worthwhile endeavor. Nevertheless, we need a measuring stick before we can perform any calculations.

Let’s take a step back. Evaluating success is going to be difficult because real economies are messier than capital markets and humanitarian goals are often muddled together with financial ones. Investments can come in the form of foreign aid, loans, direct investment in infrastructure, and more. They can come from the private sector or the public one. Goals range from finding a return on excess capital in a sovereign wealth fund to reducing hunger in an impoverished nation. The monetary value of a humanitarian goal must be soberly derived in order to conflate those results with more mercenary ones. This is not the space for that, so I will leave it at that.

Evaluating the efficacy of an investment will get us most of the way to determining its virtue, but potential externalities (positive and negative) and magnitude of risk involved need to be considered in finding a minimum return required for success. Every action at the scale involved will have some side effects and the receiving country must make a careful appraisal of those in the same way an investing country does, albeit with a separate set of parameters. The final outcome, though, is better than you could hope much of the time. We will look at a sampling of potential costs and benefits for each party along with some examples before concluding that it is likely an underutilized tool.

The reception of foreign money via aid or investment is almost always heralded by governments as the beginning of a new era of prosperity for their country or region. While not an unmitigated good, there are a host of reasons why it may be a reason for celebration. New projects bring in capital which reverberates throughout an economy. Entirely new markets may be created as more money brings more infrastructure and more traffic, creating a cycle of positive reinforcement. This traffic also brings in new ideas which can bump together with local perspectives and induce creative new businesses out of enterprising citizens.

Despite all that, care must be taken to avoid taking on too much. The risk is clear with taking on debt, but even grants carry risk. Injecting money into impoverished nations ruled by warlords or corrupt governments can cause long-term harm despite the short-term benefits by helping prolong bad governance. Other scenarios are more sinister still. The long term impact of China’s Belt and Road Initiative is yet unclear, but China has already leveraged the indebtedness of Sri Lanka to force the smaller country to give up an entire port. Other past endeavors have included rapaciousness on the subordinate country’s resources and forcing undesirable foreign policy positions.

Contributing parties may not mind some of those results, but less zero-sum benefits are plenty. Not all are intuitive. There is a law in economics that says current account (exports less imports) must be equal to the inverse of the capital account (capital inflows less capital outflows). An explanation deserves more thoroughness than is possible here, but basically this is because global accounts must balance, so a country saving more than it invests must export that capital somewhere and a country investing more than it saves must import that much more than it exports.* This property, then, means that by exporting capital via aid or loans, a country necessarily increases its current account. In summation, sending money abroad is a potential tool for reducing current account deficit if that is getting out of hand (for this same reason, reducing remittances is a terrible goal if you wish to reduce current account deficit and your name is Donald Trump). Additionally, exporting capital can create a new market for goods, it can help create a new trading partner, and it can be a source of labor. The rate of return on investment is often higher for infrastructure investments in a place with little existing infrastructure than a well-established one (see: law of diminishing marginal utility).

Potential gains in low-income markets are often much higher, but they come with commensurate risk. Investing in poor nations must be done cautiously, whether in the case of a government or business. Probability of default is obviously higher in the case of lending money than it would be for more established economies both because of unreliable government and currency risk. Dealing with low-income countries can also be difficult because the ruling parties have personal interests that may not coincide with national interests. Perhaps most problematic, though, is that funds may be misappropriated for arms and providing arms and training does not make a nation immune from them. A particularly relevant example is the case of the September 11th attacks being carried out by a group that we previously armed.

If proper precautions are taken, though, there are few more powerful foreign policy tools than foreign aid or investment. Beyond their stated goals, they can provide many additional benefits. China has shown its potency, but the abusiveness of their relationships with those low-income countries has soured some of them (although in the case of Sri Lanka, the pull of capital still proved irresistible and they have taken more loans). A fair and measured approach to continued foreign investment should be an essential part of any rich world country, but this is doubly true for the US because of our significant global interests and large military presence. Demagogues with orange hair should take particular interest in its effect on the current account.

*I highly recommend Michael Pettis’s The Great Rebalancing for a better understanding.

There currently exists a gap in the center of the political spectrum. Fear is being catered to on either side of the aisle, but optimism and reform-minded spirit have died with a whimper. The longest bull market in history combined with a renewed growth in the wages of labor, including the unskilled, should see something resembling a hopefulness to the future. Whoever first sees this gap and discerns the proper way to speak to those who exist within it will have a real opportunity to make a positive impact.

The primary difficulty in shooting this gap is that of addressing real problems encountered by the citizenry while striking the right tone of hopefulness. Labor has seen small gains recently, but unskilled laborers in the US have declined relative to their peers in emerging markets which can be partly attributed to the productivity gains from hyperefficient global supply chains. This is coupled with a decline in American global stature wrought from Chinese machinations and Trumpian foreign policy incompetence. Trump, of course, is right to recognize China’s role as an adversary to the liberal world order and, by proxy, the American role as its defender and beneficiary. Conversely, he could not be farther off the mark in its mechanisms or impact (beyond the fact that it is bad for American interests). China disrupts the global rule of law and stability in exchange for backroom deals with special interests and a global network of infrastructure debt.

Solutions to these problems are neither mutually exclusive nor short-term endeavors. The bulwark of American global supremacy rests on the tenets of open society and the power of competition to forge greatness. China prefers opaque governance, persecution of critics, and state-sponsored enterprise. To compete and win, we must play to our strengths. This means shoring up declines in population with robust immigration with a special focus on skilled immigrants. China cannot attract the ambitious the way we can because we have a reputation as a land of endless opportunity and as a place where everyone is equal under the law with reliably governance and stable institutions. Secondly, it means ensuring that the rules of competition are fair and adhered to by all. There can be no exceptions. Sometimes, this will result in short term sacrifices, but the result in the long term will be a continuation of the dominance of American firms and individuals in creating valuable intellectual property.

Here, then, lies the challenge. How can we frame this solution in a way that engenders passion and patience for its execution? Part of this involves asking, as Jack Kennedy asked, for Americans – both citizens and residents – to ask what they can do for their country. I believe, as I’m sure many do, that the best anyone can do is to invest in their own future by learning skills and living active lives – and I mean that in every sense of the word. Do not settle for a comfortable life. Engage in community and take risks. In return, the government should be there to catch you if you fall and provide both guidance and resources along the way. It’s a partnership with unlimited potential.

While a lengthier discussion would be necessary to even identify the various factors contributing to the state of American foreign policy, what we as a country value and further identify our goals, but I would like to make a brief introductory account of my thoughts. I will expand on it at a later date. Without spending too much time on it, I think it is likely that, at the least, most people have individual goals that, if not precisely the same, are at least parallel.

We all want to be valued, we want to be acknowledged and we want to be rewarded. These things are axiomatic enough that I do not think it necessary to discuss it further. The question, then is not whether we are opposed in our goals, but rather: are we making the right policy choices so that the cumulative utility of all citizens is maximized? We would likely see significantly less vitriol in politics if everyone at least recognized that simple fact.

There are, of course, bad actors. Politicians might value their own personal gains over what is best for the populace as a whole. Special interests might contribute funds or volunteers in exchange for policy decisions that benefit them while negatively impacting others. However, the average person that you might be debating these ideas with are presenting viewpoints that they believe to be the best way forward.

In regards to foreign policy, this means that some people believe we are best served by tightly controlling who and what passes through our borders closely while others believe we are better off opening ourselves to the world completely and without reservations. Neither complete isolation nor unreserved openness will yield an ideal outcome for everyone, but leaning towards the latter will certainly maximizing the cumulative well-being of the citizenry.

Drawbacks include the companies in select industries that will be out-competed by importers and citizens lacking pertinent skills out-competed by immigrants or having their wages depressed by similarly skilled immigrants willing to do the same job for less money. These are the loudest voices because their loss is greater than everyone else’s gain, but they are also a small minority. The cumulative gain across those gaining from free trade and immigration offsets the losses by a wide margin, but those gaining are rarely well organized.

Manufacturers using steel are a far greater contributors to employment and the economy, but we have just seen extraordinary protectionist measures called for by a relatively small number of individuals who lost their jobs and a small number of corporations whose profits have shrunk or are in danger of going bankrupt, all in the steel industry. A spike in steel prices may help them, but it will harm everyone not directly employed by the steel industry. It is far from the only example, but it should be fresh in the mind of anyone following current events and it is representative.

A far better response to their pleas would have been to help those impacted by the losses retrain or find alternate means of earning an income. An excellent idea would be to make small business loans and/or grants available to those in the most impacted areas. Offering scholarships to vocational programs, coding boot camps, and colleges has not worked in some cases, but it has shown promise in other areas. It would not help those who lost significant investments, but it is the nature of investing that some investments will not work out.

We can apply creative ideas to helping those who have lost out to global trade and large scale immigration without stymieing the growth and benefits that come from it. If we close ourselves to the world we will surely be left behind by those who do not. There remains a way forward in which we can lead without leaving swaths of our country behind. We should take it.

Rising inequality is a problem that has been touted by populists as proof of a broken system and explored by economists and social scientists of all disciplines. However, contrary to common misconception, inter-corporation inequality has not been rising (i.e. it isn’t the fact that the CEO is getting paid too much, even if s/he is that is causing rising inequality). Rather, decreasing competition and the rise of the internet giants has created a chasm between pay at an average company and a top-paying one. A college graduate starting their career at Google will earn an average of $133k while the average starting salary for a college graduate is only $45k. A significant portion of this may be attributable to skill differences and it’s difficult to pinpoint exactly how much inequality comes from skills gaps and how much comes from other factors, but the fact remains that some companies are able to earn significantly more income from their investments and those companies pay their employees commensurately more. This is important because the top 1% is gaining an increasing amount of their wealth from labor rather than capital. Further detail is available at a wonderful paper written by Furman and Orszag on whitehouse.gov (https://www.whitehouse.gov/sites/default/files/page/files/20151016_firm_level_perspective_on_role_of_rents_in_inequality.pdf)

The 2016 presidential election cycle has featured many themes of increasing absurdity, especially between the two populist candidates (Trump and Sanders). The primary focus here has been an America in decline. Thoughts among the two’s supporters seem to be that manufacturing has been shipped overseas and that the establishment has stood by while our huge multi-national corporations exported jobs and used loopholes to avoid taxes. Trump and Sanders agree that free trade has crushed the middle class and harmed the American economy. Without delving too deeply into the problems with populism in politics, I’d like to address the rampant misinformation involved in these claims.

Let’s talk about manufacturing first. Given the way it is spoken about, you’d think manufacturing in the US has been decimated. In fact, real output is the highest it has ever been. As shown in the chart below, we have even surpassed the peak immediately preceding the financial crisis. This would seem to show that neither Mexico nor China have stolen our manufacturing. It’s at an all-time high. However, this isn’t the whole story.

What about unemployment? They have both spoken about how we have supposedly lost millions of jobs to the various trade agreements we have in place. What does our unemployment rate look like? In fact, unemployment is sitting right at five percent. Five percent is what most economists would consider our “natural” unemployment rate. Natural unemployment just refers to the unemployment rate that we would  expect in a healthy economy.

No discussion of populism in America today would be complete without talking about wages. As any $15/hr protester would tell you, middle class wages have been stagnating for nearly a decade (even as average wages have risen, median wages have not). This has been nothing more than a simple function of supply of workers and demand for employees. Even as the unemployment numbers have been plummeting more people have been entering the workforce. While a plethora of other factors exist, these two are the most important. However, there has been cause for some optimism on this front as well. Wage growth has ticked up recently (shown to the right) and should show more signs of life going forward. I will delve more deeply into this at a later time.

Continuing on that theme, we can talk about labor force participation. During the great recession, labor force participation plummeted and has been taking an enormous amount of time to recover. At this point the labor force participation rate has almost fully recovered to its pre-recession levels (controlling for demographic) as shown to the left. This will push wages higher as employers compete for labor.

Where we will likely experience more difficulty is among unskilled labor. They may see a temporary boost as manufacturers push for more output, but as wages increase we will likely see more investment in automation. As it stands, employment in manufacturing has contracted significantly and shows few signs of real improvement. It’s just no longer possible to work and provide for a family with comfortable wages while lacking skills. At a minimum, vocational training is necessary. Finding a place for unskilled labor in the modern economy is the biggest problem facing the world right now. In fact, some skilled labor will likely even be supplanted as AI becomes more prevalent. The structural shift we are undergoing is worthy of more detail and so I will not continue to discuss it here. We’ll end with a few sobering graphs for the disenfranchised:

The skills gap between jobs available and the unemployed/marginally employed is growing.

Most employment growth has been taking place at the top. This is good news if you chose STEM (Science Technology Engineering and Math).

Manufacturing has largely been automated. We’re producing more with fewer workers. This will accelerate as labor becomes more expensive. Those fighting for the $15/hr minimum wage should take notice.